Conceptual Framework for Informal Sector and Informal Employment

224. Availability of separate data on employment and output in the informal sector is

important for policy purposes, besides helping in measuring the GDP exhaustively.

However, this sector is often missed in the current surveys and data collection mechanisms in the countries due to various reasons. This calls for procedures to identify the informal sector and laying down a methodology to measure its contribution, either directly or indirectly.

225. There are several documents and guidelines available in the public domain on the issues relating to informal sector. Some of these are, (i) proceedings of 15th International Conference of Labour Statisticians (ICLS) on informal sector (1993) and 17th ICLS on informal employment (2003), (ii) System of National Accounts 1993, (iii) OECD publication Measuring the non-observed Economy, A Handbook, (iv) UN-ECE publications Non-observed Economy in National Accounts: Survey of Country Practices (2003, 2008) (v) Delhi Group deliberations and recommendations, (vi) several ILO documents on informal sector and (vii) Chapter 25 on Informal Aspects of the Economy, System of National Accounts, 2008. Another development in this context is the launching of the Project “Interregional Programme of Technical Cooperation on the Measurement of the Informal Sector and Informal Employment”

by the UN regional commissions under the leadership of the UN Economic and Social Commission for Asia and the Pacific (ESCAP).

9.4.  Conceptual Framework for Informal Sector and Informal Employment   

9.4.1. Informal Sector

226. The term ”informal sector” is used to denote tiny units, engaged in the production of goods and services but whose activities were not recognized, recorded, protected or regulated by the public authorities and includes a wide range of activities from street vending, shoe-shining, food processing and other petty activities requiring little or no capital and skills to activities involving some amount of skill and capital such as tailoring, repair of electrical and electronic goods, and operation of transport equipment. The definitional and measurement issues of this sector outlined in some important documents are summarized below:

(a) 15th ICLS and 1993 SNA

227. In 1993, the ILO included a resolution in the ICLS (15^th ICLS) giving a conceptual framework and guidelines for the collection of statistics on the informal sector. The resolution was intended to provide the first internationally approved technical guidelines for the development of statistics on the sector. The resolution also led to including informal sector accounting in the 1993 SNA. The 1993 SNA characterised the informal sector as consisting of units engaged in the production of goods or services with the primary objective of generating employment and income to the persons concerned.

87 228. The broad characteristics of the informal sector outlined in 15th ICLS and 1993

SNA are that these are:

• Private Un-incorporated Enterprises owned by households (Enterprises owned by individuals or households that are not constituted as separate legal entities independent of their owners), as part of the household sector in SNA, with further bifurcation as (i) Own-account enterprises (that do not employ employees on a continuous basis) and (ii) Enterprises of employers (that employ one or more employees on a continuous basis). (There is also a terminology difference between the ICLS and the SNA, although ICLS terms the informal sector as a sub-sector of household sector of SNA. The informal sector referred to in the 15^th ICLS refers to a group of producing units, whereas the household sector in SNA refers to an institutional unit consisting of both production and consumption units);

• Units for which no complete accounts are available that would permit a financial separation of the production activities of the enterprise from other activities of its owners;

• Produce at least some of their goods or services for market (sale or barter) (as against the SNA concept of market producers as those that sell most or all of their production on the market at economically significant prices);

• Produce goods and services using labour as input (as against the SNA concept which also includes production for own consumption without using labour as output, such as owner occupation of dwellings). The ICLS recognized that depending on national circumstances, certain production units of the households sector may fall outside the distinction between formal and informal sectors, such as the units exclusively engaged in (i) agricultural activities, (ii) production of goods for own final use, and (iii) production of services for own final consumption by employing paid domestic workers;

• refers to a group of production units based on their characteristics, irrespective (i) kind of workplace where the productive activities are carried out, (ii) extent of fixed capital assets used, (iii) duration of the operation of the enterprise (perennial, seasonal or casual), (iv) operation as a main or secondary activity of the owner;

• The employment size of the enterprise is below a certain threshold (to be determined according to national circumstances);

• And/or not registered under specific form of national legislation.

(b) Expert Group on Informal Sector Statistics (Delhi Group)

229. The “Expert Group on Informal Sector Statistics” commonly known as the “Delhi Group” was set up in 1997 as one of the city Groups of United Nations Statistical Commission (UNSC) to address various methodological issues involved in the treatment of the informal sector.

230. The Delhi Group held 12 meetings since its inception and came to the conclusion that the informal sector manifests itself in different ways in different countries.

Therefore, national definitions of the informal sector cannot be fully harmonised. It

88 recommended that international agencies should disseminate informal sector data according to the national definitions used. In order to enhance the international comparability of informal sector statistics, the Delhi Group adopted several recommendations, principal among them are:

(i) All countries use the criteria of legal organisation (un-incorporated enterprises), of type of accounts (no complete set of accounts) and of product destination (at least some market output);

(ii) Specification of the employment size limit of the enterprise in national definition of the informal sector is left to the country’s discretion. For international reporting, however, countries should provide figures separately for enterprises with less than five employees. In the case of multiple-establishment enterprises, the size limit should apply to the largest establishment;

(iii) Countries using household surveys or mixed surveys should make an effort to cover not only persons whose main job is in the informal sector, but also those whose main job is in another sector and who have a secondary activity in the informal sector.

231. The current ongoing activity of the Delhi Group is the preparation of Manual on Surveys of Informal Employment and Informal Sector by the ILO.

(c) 2008 SNA

232. Chapter 25 of 2008 SNA, “Informal aspects of the economy” summarises the definitional and measurement issues dealt by the ICLS and the handbook on NOE and supplements these with the identification of informal sector units and approaches for collecting data from them.

233. The chapter examines the characteristics of production units and tries to identify those significant for the non observed economy, the informal sector or both. The chapter also discusses the differences in terminology and concepts between the SNA

& ICLS, especially on ‘sector’³², ‘enterprise³³’, and ‘sub-sectoring production’³⁴.

32ICLS refers informal sector to a group of production units, whereas the SNA refers a sector to an institutional unit.

33 The use of unincorporated enterprise in the ILO description of the informal sector does not correspond to the totality of unincorporated activity of a household but to each activity separately. In SNA terms, the unincorporated enterprise is broken down into a number of unincorporated establishments, some of which may be included in the informal sector and some excluded, even for the same household. Further, the ILO identifies individual members of a household as owning each establishment/enterprise and capable of employing workers. In the SNA, it is the household collectively that is responsible for all activity and for employing workers. (Para 25.50, SNA, 2008)

34Producers for own final use need to be sub-divided into those where some of the production is for sale or barter and those where the production is exclusively for own final use for the ILO concept. In the case of unincorporated enterprises where only some of the production is sold or bartered, all of the production of the unit of those goods and services is still included in production by the informal sector. (Para 25.51, SNA, 2008)

89 234. The 2008 SNA notes that ICLS always regarded informal sector as a subset of

household unincorporated enterprises operating within the production boundary of the SNA. Thus, for identification of informal sector, the SNA household sector is divided into:

ƒ households containing an unincorporated enterprise that is registered or has more than a given number of employees;

ƒ institutional households, such as prisons, religious orders and retirement homes etc.;

ƒ households with no unincorporated enterprises;

ƒ households only undertaking production for own final use (services of owner occupied dwellings, subsistence farming, and services of paid domestic staff);

ƒ Informal sector enterprises (Households containing unincorporated enterprises that are not registered and/or have less than given number of employees)

• without employees "informal own-account enterprises"

• with employees "enterprises of informal employers"

235. The operational guidelines to identify activities undertaken by informal enterprises within the national accounts are in the following manner:

– exclude the following from SNA households sector

• Institutional households such as prisons, and retirement homes

• Households with no production activity

• Produce exclusively for own final use

• Households whose only activity is the production of services from owner-occupied dwellings, the production of services by employing domestic staff

• NPISH, if included in household sector

• Agricultural production

• Households with enterprise that is registered or has more than a given number of employees

– to consider national practices in establishing the households sector to see if any adjustment to the first step is necessary.

– to provide a breakdown by type of activity so that common exclusions according to type of activity can be made.

9.4.2. Informal Employment

236. As a consequence of rapid economic development and specialization of services and the increase in demand for labour resources in the recent past, the business community has moved towards outsourcing of services. This phenomenon has contributed to the development of more casual arrangements between owners of enterprises and those contributing labour services in the form of informal employment.

237. Informality of employment is characterized by absence of contracts, social protection, entitlement to certain employment benefits and not being subject to

90 labour legislation or taxation. Broadly, the informal employment comprises informal jobs both in informal and formal enterprises and in households. A person can simultaneously have two or more formal and/or informal jobs. Due to the existence of such multiple job holding, jobs rather than employed persons are taken as the observation units for employment.

238. The conceptual framework of the informal employment endorsed by the 17th ICLS relates the enterprise-based concept of employment in the informal sector in a coherent and consistent manner with a broader, job-based concept of informal employment.There are five categories of jobs considered by the ILO. These are:

a) own-account workers (the self-employed in SNA terms);

b) heads of unincorporated enterprises with employees, treated as employers;

c) unpaid family workers contributing labour to the unincorporated enterprise;

d) employees; and

e) members of producers’ cooperatives.

239. Informal employment can be identified from the above five categories of jobs.

Formal enterprises provide informal jobs only as employees or contributing family workers. Informal enterprises may offer any of the five types of informal jobs and also formal jobs. Households provide informal jobs as own-account workers, employees and family workers. Some domestic staff may have formal jobs.

9.4.3. Presenting data on informal sector and informal employment

240. For the reasons that the informal sector (i) comprises a group of production units (rather than as a sector in SNA concept), (ii) do not maintain complete accounts and (iii) its activities cannot be separated from other activities of the owners (other income flows, consumption and capital formation cannot be segregated between the activities and households to which the owners belong), it is not possible present their full sequence of accounts, according to 2008 SNA. However, since the informal sector comprises a group of production units engaged in industrial activities, it is possible to present the production and generation of income accounts, in the same manner as these accounts are compiled for activities.

241. The 2008 SNA recommends that where possible two supplementary tables should be prepared, one covering production and the generation of income and one covering employment.

• Production and generation of income – Production

• of which for own use – Intermediate consumption – Value added

– Compensation of employees – Gross mixed income

– Consumption of fixed capital

91 – Net mixed income.

• Employment

– Employment in the informal sector

• formal jobs

• informal jobs

– Informal employment outside the informal sector

• in the formal sector

• in other household unincorporated enterprises.

9.4.4. Approaches to measuring activities undertaken in the informal economy

242. The approaches for measuring the informal sector and informal employment have been discussed in detail in the documents mentioned above, especially, the handbook on NOE and the “Interregional Programme of Technical Cooperation on the Measurement of the Informal Sector and Informal Employment”. The 2008 SNA suggests either direct or indirect approaches to measure the informal sector, through the following surveys:

• Household surveys

– Mainly labour force surveys

• Establishment surveys

• Mixed household-enterprise surveys (In these surveys (also known as 1-2 surveys), an enterprise module is attached to the labour force or other household surveys, and information on the activities of the enterprises is collected from the entrepreneurs identified in the household surveys. In another variant of these mixed surveys, informal sector enterprises are identified through household survey and information is collected from these identified units).

(a) Direct approach

243. The activities undertaken in the informal sector are measured through direct approaches in which data on output (if possible by products), intermediate consumption and changes in inventories are collected from the informal sector enterprises, through the establishment surveys or mixed household-enterprise surveys. Generally, the production approach is considered the best approach to estimate informal sector value added.

(b) Indirect approach

244. One of the indirect approaches to estimate the output of informal sector in particular and the non observed economy in general, is through the labour input method suggested in the Handbook on Non-Observed Economy. This procedure involves three basic steps: (i) obtaining estimates of the supply of labour input to GDP, according to kind of economic activity and size of enterprise, from a household

92 labour force survey, population census and/or other demographic sources; (ii) obtaining estimates of output per unit of labour input and value added per unit of labour input for the same activity and size breakdown from regular or special purpose enterprise survey; and (iii) multiplying the labour input estimates by the per unit ratios to get output and value added for the activity and size categories.

245. It is generally observed that establishment surveys under-report employment numbers, as informal sector units may conceal employment in order to evade taxes or administrative regulations. Therefore, direct estimation of informal sector through establishment surveys could result in under-estimation of informal sector GDP. On the other hand, the labour input method takes care of this under-estimation by using the workforce data from labour force surveys/population censuses. These sources are expected to give a more complete coverage of labour input to GDP than the enterprise surveys, and therefore, would provide a basis for GDP exhaustiveness and consistent estimates between employment and output. Also, persons engaged in illegal activities and underground production may report as workers in the labour force surveys, and thus the labour input method ensures covering more NOE activities, besides the informal sector.

246. For the labour input method, it is necessary to prepare a labour input matrix for estimating the formal and informal jobs, by activity and by institutional sectors with further disaggregation within household sector by formal and informal units. Such detailed data are generally available in the labour force or other demographic surveys. Alternatively, the employment by activity in the formal sector available from regular enterprise/establishment surveys or administrative sources could be subtracted from the overall estimates of jobs obtained from the labour force surveys, to derive the data on informal jobs/jobs in informal sector, in various institutional sectors and informal sector units, as a residual. It is important to go through the reconciliation process when more number of sources are used, to prepare the labour input matrix.